Rethinkng Sovereign Debt Restructuring

Transcription

SOVEREIGN DEBT RESTRUCTURING
Rethinking
Sovereign Debt
Restructuring
Dr Rodrigo Olivares-Caminal
London,
June 2011
1
“Spain is not Greece”
Elena Salgado, Spanish Finance Minister, Feb. 2010
“Portugal is not Greece”
The Economist, 22 Apr. 2010
“Ireland is not in Greek Territory”
Irish Finance Minister Brian Lenihan.
“Greece is not Ireland”
George Papaconstantinou, Greek Finance Minister, 8 Nov. 2010
“Spain is neither Ireland nor Portugal”
Elena Salgado, Spanish Finance Minister, 16 Nov. 2010
“Neither Spain nor Portugal is Ireland”
Angel Gurria, Secretary-General OECD, 18 Nov. 2010
2
3
… and, even on:
4
INSOLVENT OR NOT INSOLVENT?
(that is the question)
Liquidity problems are evidenced when a debtor fails to
perform his obligations when they have fallen due (liquidity test).
Illiquid debtor still solvent despite the fact that he is not able
to perform his obligations.
Insolvent the amount of obligations has exceeded the value
of his assets, quite irrespective of whether he timely performs his
obligations (assets test)
The difference between liquidity and insolvency is difficult to
establish—even more in the context of a sovereign state where
solvency is presumed.
Can a sovereign state be declared insolvent (?)
• tax its citizens
• dispose of its resources
a. natural resources
b. part of its territory (e.g. Alaska or Louisiana)
c. expropriation of assets of its own citizens
ECONOMIC LITERATURE ON DEFAULTS (1/1)
Sovereign debt = private debt: there is no structured approach for managing sovereign defaults or an effective
procedure for enforcing sovereign debt contracts.
Sovereign debt creditors have limited legal recourse: limited enforceability
Since contracts cannot be easily enforced, why do sovereigns repay?
The economic literature on sovereign debt has focused on the reputational and trade costs of defaults.
•Reputational effects:
+: defaults lead to either higher borrowing costs or more limited access to the international financial
markets, and, in the extreme case, to a permanent exclusion from these markets (Eaton and
Gersovitz, 1981).
- : reputational costs appear to be limited and short lived (Borensztein and Panizza, 2009)
•Trade Costs
+: defaulters will suffer a reduction of international trade, either as a consequence of direct trade
sanctions (Bulow and Rogoff, 1989, Díaz-Alejandro, 1983) or because of lack of trade credit.
-: there is some evidence that defaults affect trade (Rose, 2005), there is no evidence of formal trade
sanctions (at least in recent times) or of a strong causal nexus from default to trade via trade credit
(Borensztein and Panizza, 2009).
ECONOMIC LITERATURE ON DEFAULTS (2/2)
A possible answer … ONLY
strategic defaults (i.e., defaults that
could have been easily avoided)
carry a high cost.
Defaults due to true inability to
pay are unavoidable
• They do not provide any
signal on the type of
government and do not carry
a large cost (Grossman and
Van Huyck, 1988).
Knowing the high cost of
strategic default, countries will
avoid them.
Downside: sovereigns may pay a
large cost by trying to postpone a
necessary default in order to signal
to all parties that the default was
indeed unavoidable (Borensztein
and Panizza, 2009, and Levy
Yeyati and Panizza, 2009).
Borrowers
Perspective
Multilateral
Lending
Bilateral
Private
Lending
Lending
Lenders
Perspective
Ex-ante
Ex-post
UNDERSTANDING THE DYNAMICS OF SOVEREIGN DEBT RESTRUCTURING
Creditors
IFI
L
O
A
N
Sovereign
(Debtor)
Bilateral
FINANCING
B
O
N
D
Private Investors
O
F
I
C
I
A
L
P
R
I
V
A
T
E
- The relationship
between each type
of creditor and the
debtor is governed
by a different set
of rules
- Upon an event
of default, the
interest of each
type of creditor is
different (inverse
to the pre-Brady
era)
9
UNDERSTANDING THE DYNAMICS:
CREDITORS’ PERSPECTIVE
IFI’s:
- Articles of Agreement (Treaty)
Bilaterals:
- Paris Club
(i) An informal group of official
creditors willing to treat in a coordinated way the debt due to
them by the developing countries.
(ii) It can be described as a "non
institution".
(iii) Makes decisions on a case by
case basis in order to permanently
adjust itself to the individuality of
each debtor country.
10
1982: PRE-BRADY PLAN
LOAN
-Parties: Banks (regulated – Deposit Ins.)
-Type of relationship: personal
-Type of Doc.: Loan Agreement
-Payment: Interest Rate & Quotas
-Docs: Info. Memo
2002: POST-BRADY PLAN
BOND
-Parties: Private Investors
-Type of relationship: impersonal
-Type of Doc.: Bonds (Indenture)
-Payment: Coupon & Bullet Payment
-Docs.: Offering Circular & Prospectus
Exposure: 287.7% of banks’ total capital
11
Mechanism
SDRM – 1
Krueger
(2001)2
SDRM – 2
Krueger
(2002)3
SDRM – 3
IMF (2003)4
Legal Stay
Capital Controls
+
Automatic stay
Key features of SDRM1
Financing
Reorganization
Preferred Creditors
+
Limited IMF lending
Payments standstill
+
short stay which may
Preferred creditor
be renewed upon the
status for new money
decision of a super
majority vote of
creditors
Preferred creditor
Stay upon the decision status for new money
of a super majority upon the decision of a
vote of creditors
super majority vote of
creditors
Restructuring
Debt
Negotiations
supervised by IMF
+
IMF program
Restraining
Holdouts
Super majority
voting
+
Arbitration?
Negotiations
supervised by
neutral agency
+
IMF program
Super majority
voting across all
classes
Negotiations with
creditors
+
IMF program
Super majority
voting across all
classes
1
SDRM-1 and SDRM-2 are from a table included in Marcus Miller, Sovereign Debt Restructuring: New Articles, New Contracts-or No Change?, International Economic Policy Briefs, Bo. PB02-3, April 2002,
available at http://www.iie.com/publications/pb/pb02-3.pdf, (last visited 16 November 2004).
2
Anne Krueger, International Financial Architecture for 2002: A New Approach to Sovereign Debt Restructuring, address at the National Economists' Club Annual Members' Dinner American Enterprise Institute,
Washington DC, November 26, 2001, available at http://www.imf.org/external/np/speeches/2001/112601.htm, (last visited 17 November 2004).
3
Anne Krueger, New Approaches to Sovereign Debt Restructuring: An Update on Our Thinking, Conference on ‘Sovereign Debt Workouts: Hopes and Hazards’, Institute for International Economics
Washington DC, April 1, 2002, available at http://www.imf.org/external/np/speeches/2002/040102.htm, (last visited 16 November 2004).
4
International Monetary Fund, Proposals for a Sovereign Debt Restructuring Mechanism (SDRM). A Factsheet, January 2003, available at http://www.imf.org/external/np/exr/facts/sdrm.htm, (last visited 17
November 2004).
12
One picture is
worth a
thousand
words ... (this
one, probably
more!)
13
There is an informal legal framework built on previous restructuring
experiences and mainly NY case law. No formal regime.
Sovereign Debt Restructuring
NY Law
UK Law
NY Approach
London Approach
Court Supervised
Contractual Terms
CACs
Class Action
SDRM
Exchange Offer
Exit
Consent
14
UNDERSTANDING THE DYNAMICS OF SOVEREIGN DEBT
RESTRUCTURING
APPROACH TOWARDS A SICK PATIENT
Diagnosis
What is the real
situation?
Apply first aid
How can sovereign
buy time and
minimize
impact of crisis?
Determine cure
Which restructuring
is the appropriate
path for
bondholders?
Operate on patient
How should
sovereign debt be
restructured?
15
UNDERSTANDING THE DYNAMICS: CREDITORS’ PERSPECTIVE
Private Investors:
•
Sophisticated vs. Un-sophisticated
•
Trust Indenture v. Fiscal Agency
•
Bonds issued either under NY law or UK law (different amendment terms)
NY:
Payment terms: unanimity (100% of the nominal value of the series)
Other terms: 662/3 % of the nominal value of the series
UK:
Simply majority of the nominal value of each series
Quorum:
Payment terms: persons representing not less than 75 %
Other terms: two or more persons representing more than 50%
16
FISCAL AGENT v. TRUSTEE STRUCTURES
Role / Position
Fiscal Agent
Trustee
English Law
New York Law
Legal Position –
Agent of Issuer?
Yes
No
Overriding Duty
To the Issuer
To the Bondholders
Not significant
(administrative)
Yes – Can be significant (most enforcement
powers vested in Trustee)
No
Yes
Discretionary Powers
Monitoring duties
Position of Bondholders
Can take action
individually
Trustee takes action
that binds all
bondholders (based on
Trustee’s own initiative
or as instructed by
required % of
Bondholders)
Mostly same as English
Law; except that
individual bondholders
may take action in case
of Non-payment
17
UNDERSTANDING THE DYNAMICS: RESTRUCTURING AIMS
Obtain debt sustainability by reducing
debt burden in an orderly manner.
Protect the value of the assets and the
rights of the creditors to avoid litigation.
Achieve the restructuring over a short
time of period to reduce disruptions and reaccess capital markets.
Share effort by all the parties involved
(exception).
Chicago Mercantile Exchange
18
DIFFERENT ALTERNATIVES FOR THE CREDITORS & DEBTOR
CREDITOR
IFIs
- Roll-over vs. default
- Moral hazard vs. haircut?
Bilateral Agreements
(Paris Club)
- Roll-over vs. default (A
way of hair-cut: NPV)
- Hair-cut accepted for
HIPC (Iraq)
Private Investors
- Accept exchange offer
(hair-cut)
- Litigate (organized
action vs. individual
action)
- Holdout and ambush
debtor (Elliot)
DEBTOR
IFIs
- Roll-over vs. default
Bilateral Agreements
(Paris Club)
- Roll-over vs. default (A
way of hair-cut: NPV)
- Hair-cut accepted for
HIPC (Iraq)
Private Investors
- Exch. offer (haircut?)
- Exit Consent
- Contractual
Enhancements
- CACs
- Collective Actions
- Trustee v. Fiscal Agent
- SDRM?
19
SOVEREIGN DEBT
Where from—where to?
2010: Pples
2006: Committee
+ CAC
+ Transparency
2005:
Carib. App.
2009:
Insolvency?
2010: Usury?
2005: Back-door SDRM
2004: Aries
2011: EFSF/ESM/CACs
2003: NY CACs
2007: D v Z 2009:
Seychelles
2005: EM /NML
2002-2005: Blocking
2010: FG Hem. v DR Congo
2004: Urban v Argentina Class
2004: Law 4765
2000: Elliot
2003: Best Deal
2002: SDRM
1999: Paquistan
2000: Exit Consent
1998: Russia
1985: Baker
Plan
1998: Ukraine
1992: Weltover
1989: Brady Plan
1983: Ad-hoc arbitration
20
21
TGT (The Greek Tragedy)
ACT I: Mistmatch 31/12/2014 - 150% Debt/GDP ratio (approx.)
ACT II: Assuming: NO Haircut
- Primary Deficit to at least "0“ (Deficit decreases from 9% to 0% or that there will be a Primary
Surplus)
- Interest Rate Cost of 4.6% then it should produce a growth rate of at least 5.0% (so as Debt/GDP
ratio to remain Stable
ACT III: Way forward?
- Haircut is the only viable solution but buying back bonds at market value (i.e. almost 25% to 30%
haircut) will not be accepted because this is going to be a direct Fiscal Transfer from the Countries that finance
EFSF + Moral Hazard
EPILOGUE: Magic word: Debt Re-Profiling (especially now that big part will be on ECB’s hands)
Is debt reprofiling enough?
NO, RESTRUCTURING
22
EFSM
€60bn
EFSF
ESM
€440bn
€700bn
Available to all 27 EU member
states
For
EAMS
for EAMS
EAMS
€250bn
Up to half the amount drawn
from EFSF and EFSM 23
Who?: The European Financial Stability Facility (EFSF) is a
Luxembourgish company incorporated in 2010 by the 16 countries
that share the euro.
What?: Provide temporary financial assistance (3 year loan with
an average maturity of 7½ years) to EAMS in difficulty.
Where?: EMU
How?:
issue AAA bonds (backed by 120% guarantees given by
the 16 euro area Member States of up to € 440 billion on a
pro rata basis) or other debt instruments on the market to
raise the funds needed to provide loans.
In exceptional circumstances intervene in the debt primary
market in the context of a programme with strict
conditionality.
Not authorised to intervene in the secondary market.
When?: EAMS in financial difficulties.
Why?: To preserve financial stability of EMU.
24
INVESTORS
PURCHASE
PRICE
P+I
PAYMENT
SECURITIES
EFSF
CASH RESERVES
BORROWER
CASH
RESERVE
LOAN
LOAN CASH
BUFFER
P+i
IMF
€250bn
EAMS BORROWER
EFSM
€60bn
Bilateral Lending
25
EFSF FLOW DIAGRAM
EAMS is unable
to borrow on
markets at
“acceptable”
(?) rates.
Acceptance of
the Programme
by the euro area
finance ministers
EAMS
requests
support
A country
programme has
been negotiated
with the European
Commission and
the IMF
Signing of
a MoU
EFSF Loan
26
CREDIT ENHANCERS
Under the Framework Agreement (of constitution of the EFSF)
there are several credit enhancers.
-Guarantees
-Grossing up of guarantees (120% over-collateralisation)
- Loan-specific cash buffer (50bp on the aggregate principal
amount)
-Cash reserve (the net present value of the margin of the
EFSF loan)
-Such other credit enhancement mechanism as may be
approved (Article 5, EFSF Framework Agreement)
A downgrade of a member country would not necessarily lead to
a downgrade of EFSF securities.
Guarantees are several, irrevocable, firm, unconditional and
binding.
If a guarantor did not respect its obligations, guarantees from
others could be called in to cover the shortfall.
The cash reserve and the loan-specific cash buffer are invested
in very safe and liquid assets (asset-liability management
conducted by the German Debt Management Office).
27
EFSF: MISCELLANEOUS
EFSF will only provide financial support if a EAMS loses access to markets (NO pre-funded or
precautionary credit lines as LOLR under strict conditionality).
It could be agreed with a EAMS that funds are to be used to stabilise the banking sector (see
Irish Programme—€35 billion out of the total €85 billion allocated to the banking sector).
The volume of the EFSF, together with the EFSM and the IMF, is large enough to provide
temporary liquidity assistance to several Member States of the euro area.
EFSF does not have any currency limitation for its funding activities (majority of funds
expected to be raised in €).
EFSF will not crowd other borrowers out of the market EFSF will substitute refinancing
needs of a country that is unable to borrow at reasonable rates.
Fail to meet conditions? the loan disbursements and the country programme would be
interrupted review of the country programme + renegotiation of the MoU.
Member States that are not members of the euro area cannot access the EFSF (Balance of
Payments facility under Council Regulation (EC) No. 332/2002 = €50bn)
Greece financial assistance was arranged prior to the EFSF’s existance
28
GUARANTEE PROVIDERS
3%
0%
0%
0% 1% 2% 3% 3%
Belgium
3%
Germany
Ireland
Spain
6%
0%
France
27%
Italy
Cyprus
Luxembourg
18%
Malta
2%
12%
20%
Netherlands
Austria
Portugal
Slovenia
Slovakia
29
SHAREHOLDER CONTRIBUTION
Source: EFSF
30
“The Aaa rating is based on EFSF’s contractual
elements,
including
the
irrevocable
and
unconditional guarantees by the participating
states, EFSF’s cash reserve and the loan-specific
cash buffer as well as the creditworthiness of the
participating Aaa Eurozone Member States and their
firm commitment to EFSF.”
RATINGS
“The ‘AAA’ rating is based on the credit
enhancement provided by the ‘over-guarantee’
mechanism and cash reserves. The cash reserves
will be sized to ensure that any potential shortfall of
‘AAA’ guarantor coverage of EFSF debt payments
due in the event of a borrower default will be
sufficient to meet all payments.”
“The rating on EFSF reflects our view that
guarantees by ‘AAA’ rated sovereigns and freely
available liquidity reserves
invested in ‘AAA’
securities will, between them, cover all of EFSF’s
liabilities.”
31
CDO V. EFSF
Feature
CDO
EFSF
Credit Enhancer
Over Guarantee
Cash Buffer
Cash Reserve
Guarantee
Underlying
(Collateral) Asset
X
32
IRELAND’S FINANCIAL ASSISTANCE PROGRAMME
28/10/10: ECOFIN Ministers, European Commission
and the ECB agreed to provide a loan to Ireland to
safeguard the financial stability in the euro area and the
EU as a whole.
Total lending programme €85 bn.
The programme for Ireland will be financed as follows:
-€17.5 bn from Ireland (Treasury and the National
Pension Fund Reserve)
-€22.5 bn from IMF
-€22.5 bn from EFSM
-€12.9 bn from EFSF
-€4.8 bilateral loans:
UK (€3.8 billion)
Denmark (€0.4 billion)
Sweden (€0.6 billion)
The programme rests on three pillars: (1)
strengthening and comprehensive overhaul of the
banking system; (2) ambitious fiscal adjustment; and,
(3) growth enhancing reforms, in particular on the labour
33
market.
PORTUGAL’S FINANCIAL ASSISTANCE PROGRAMME
17/5/11: the Eurogroup and ECOFIN Ministers agreed to
grant financial assistance.
Total lending programme €78 bn.
The programme for Portugal will be financed as follows:
-€26 bn from IMF
-€26 bn from EFSM
-€26 bn from EFSF
The three year joint EU/IMF programme is based on
three pillars: (1) fiscal adjustment (including better control
over
Public-Private-Partnerships
and
State-Owned
Enterprises; reforms of the health system and of public
administration; ambitious privatisation programme); (2)
growth and competitiveness enhancing reforms of the
labour market, the judicial system, network industries and
housing and services sectors; and, (3) measures to ensure
a balanced and orderly deleveraging of the financial sector
and to strengthen the capital of banks, including adequate
support facilities.
34
ESM
24-25/03/11: the European Council confirmed to establish
a permanent crisis resolution mechanism – the European
Stability Mechanism (ESM).
Operational as of mid-2013 following an amendment to
the European Treaty by 1 January 2013 (Art. 136)
The ESM will be established as an intergovernmental
organisation under public international law.
The function of the ESM will be to mobilise funding and
provide financial assistance (under strict conditionality) to
EAMS.
ESM may also exceptionally intervene in the debt
primary market under the same conditionality.
The ESM will have a capital structure similar to
multilateral lending institutions of € 700 bn. (effective
lending capacity will be €500 bn).
-Paid-in capital (€80 bn)
-Callable capital + Guarantees (€620 bn)
35
ESM: TECHNICAL ASPECTS
ESM will work closely with the IMF in providing
financial assistance + active participation of the IMF
(in all circumstances) will be sought on a technical
and financial level.
The debt sustainability analysis will be jointly
conducted by the Commission and the IMF, in
liaison with the ECB.
The policy conditions attached to a joint ESM/IMF
assistance will be negotiated jointly by the
Commission and the IMF, in liaison with the ECB.
EAMS may participate on an ad hoc basis
alongside the ESM in financial assistance
operations for euro area Member States.
This therefore means that the ESM would not
require the credit enhancements of the EFSF to
secure a AAA rating.
36
New Paragraph
Art. 136
EU Treaty
"The Member States whose currency is the euro may establish a
stability mechanism to be activated if indispensable to safeguard
the stability of the euro area as a whole. The granting of any
required financial assistance under the mechanism will be made
subject to strict conditionality".
37
ESM SHAREHOLDER CONTRIBUTION KEY
(BASED ON ECB CONTRIBUTION)
1%
3%
0%
0%
0%
12%
3% 3% 0% 0%
2%
6%
20%
18%
27%
2%
3%
Austria
Belgium
Cyprus
Estonia
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Malta
Netherlands
Portugal
Slovakia
Slovenia
Spain
38
or
… rara avis or another layer of bureaucracy?
39
E
S
M
F
L
O
W
D
I
A
G
R
A
M
ESM Stability Support
(ESS) request from a
EAMS
The EU Commission and
the IMF (+ECB) will be
responsible for
monitoring compliance
with the policy
conditionality.
The EU Commission
together with the IMF
and in liaison with the
ECB will assess the
actual financing
needs of EAMS
ESM’s Board of
Directors will then
approve the financial
assistance agreement
containing the
technical aspects of
the assistance.
The EU Commission and
IMF (+ECB) will
negotiate a macroeconomic adjustment
programme with the
EAMS in a MoU
EU Council will endorse
the macro-economic
adjustment programme
and the Commission
will sign the MoU on
behalf of the EAMS.
40
PRIORITY?
The EFSF has the same
standing
as
any
other
sovereign claim on the country
(pari passu)
IMF
ESM
ESM will enjoy preferred
creditor status in a similar
fashion to the IMF, while
accepting preferred creditor
status of IMF over ESM.
Other Creditors
41
THE BIG DILEMMA
… rara avis,
another
layer of
bureaucracy?
or
42
CACS: CRITICISM
In a small outstanding amount a
modest investment can position a
creditor in the driver’s seat (hold-out
= 26% of the issue) CACs cannot
be used.
At an adjourned bondholders’
meeting where the quorum has been
reached with only 25% the bond
can be cancelled with the affirmative
vote of 18.75% of the holders (75%
of 25%).
Bondholder’s are not practical (as
opposed to US written amendments
practice).
Several bondholders meetings for
several series of bonds.
43
G 10 RECOMMENDATIONS (2002)
+
MEXICO, BRAZIL & URUGUAY 2003
The 75% supermajority should be 75% of the
aggregate outstanding amount of the issue even if the
vote occurs at a bondholders’ meeting.
Reserve Matter modifications could be made either by
a vote at a bondholders’ meeting or by written consent.
The list of Reserve Matter should be expanded to
include other issues beyond a traditional English-style
CAC (e.g. authorization for the trustee or fiscal agent
to exchange the entire series).
Aggregation: 85% of the aggregate outstanding
amount of all bonds + affirmative vote of at least
66⅔% of the holders of each series affected by the
modification.
44
Statement by the Eurogroup (28 November2010):
“In order to facilitate this process, standardized and identical collective action
clauses (CACs) will be included, in such a way as to preserve market liquidity, in
the terms and conditions of all new euro area government bonds starting in June
2013. Those CACs would be consistent with those common under UK and US law
after the G10 report on CACs, including aggregation clauses allowing all debt
securities issued by a Member State to be considered together in negotiations.”
45
ISSUES TO BE DETERMINED BEFORE 30 JUNE 2013
Implementation: Each series or a Master
Issuance Documentation?
Administrator (UK/US Trustee)?: votes,
currency conversion, etc.
Are CACs enforceable on every
jurisdiction? Different Interpretations.
Governing Law? UK (only for the
clause or a MID = dépeçage)
Aggregation + De-aggregation?
Disenfranchaisement:
“owned
controlled (directly or indirectly)”
or
Vote packing?
46
Meetings of Noteholders
Convened by Issuer
and Guarantors
Convened by the Trustee
upon request of
noteholders holding 10%+
Q: Representation
at least 66 ⅔% of
principal amount
All other matters
Q: 2+ persons
representing 50% of
principal amount
Extraordinary
Resolution
Reserved
matters
Written Resolution
Signature
Adjourned
meeting: 25% of
principal amount
representation
Reserved matters:75+% of
principal amount representation
Adjourned meeting:
2+ noteholders
No consent of
Noteholders
needed
Other matters: 66⅔% of
principal amount representation
Modification and Waiver
(not materially prejudicial to the interest of
noteholders ; of minor matters or to correct
manifest error )
Trustee must
notify Noteholders
BUSTING SOME
MYTHS ...
Countries can be insolvent.
A restructuring implies a default.
A restructuring will trigger CDS.
After default a country cannot re-access the
capital markets.
A EAMS can leave the euro.
Some of the debts of Greece, Portugal and/or
Ireland are odious debts.
Vulture funds are bad.
Due to the pari passu clause, when a payment
48
is made I will also receive a share.
EFSF debt has priority.
John B. Moore: ‘[c]hanges in the
government … of a state do not as a
rule affect its position in international
law. A monarchy may be transformed
into a republic, or a republic into a
monarchy; absolute principles may be
substituted for constitutional, or the
reverse; but, though the government
changes, the nation remains, with
rights and obligations unimpaired’.
Jackson v. People’s Republic of
China: ‘[t]he People's Republic of
China is the successor government
to the Imperial Chinese
Government and, therefore, the
successor to its obligations’.
ODIOUS DEBTS:
THEORY & PRACTICE
The rationale behind the state
succession doctrine is that the
government in office should be
separated from the sovereign
state.
The government is an agent
contracting on behalf of the debtor,
the sovereign state.
Exception to the Doctrine of State
Succession
AN ODIOUS
MUTATION
Odious
Debts
Only apply in cases of newly
independent states
Did not make its way to any norm
Debts of
an
Odious
Regime
All debts are illegitimate: mutation
What is a despotic Regime? Marcos?
Fujimori?
Illegitimate
Debts
Who will make the assessment?
Which will be the competent court?
Money lent to build a hospital?
‘[t]here is … no justification to characterize
these debts as illegitimate in the legal sense’.
a one-off debt relief policy measure and that
all future debt forgiveness will be performed
through multilaterally coordinated debt relief
operations
ILLEGITIMATE ?
Narrow exceptions of the doctrine of state succession made
inapplicable the odious debts principle—the ‘supporters of the
political approach’ embraced a new terminology.
Multiple definitions of illegitimate debts: (1) debt incurred by
non-democratic governments; (2) debts incurred with
elements of corruption; (3) debts used against the interests of
the people who has to repay them; (4) debts which cannot be
serviced without causing harm to the population (threatening
the realization of basic human rights); (5) debts incurred with
high interest rates (usurary or predatory); and, (6) debt
resulting from Brady plan agreements.
The concept of illegitimate debts has not been conceived as a
purely legal definition but rather encompassing ethical, social
political and economic implications.
‘Supporters of the political approach’ cannot be subject to a
legal analysis because it is not based on legal principles lack of the authority to declare illegal the debts.
Illegitimate moral, social, legal, etc different standards neither illegal, nor odious NOT SUBJECT TO LEGAL
ANALYSIS
ANOTHER
CASE STUDY:
(Ecuador
Again!)
Ecuador had gone through two sovereign debt restructurings (95’ and 00’) and
managed to obtain substantial debt relief.
2006 Presidential election: a candidate campaigned on a platform that implicitly
referred to a redirection of a substantial amount of the money used to service
external debt into social programs.
With the pretext to redirect the use of public resources allocated to service
Ecuador’s external debt incorporated the CAIC
The audit report produced by the CAIC includes several findings, mainly that
there were several cases in which Ecuador’s debt was incurred by illegal and/or
illegitimate means.
The continuous increase in oil prices between 2002 and 2008, allowed Ecuador
to amass an enviable amount of USD reserves (external debt represented 26.12%
of GDP, which was totally manageable).
A 2008 financial report stated that the default might ‘…reflect [an] increased need
to have enough fiscal resources to guarantee a successful election result’ and that
‘…it is still difficult to argue that Ecuador’s debt faces a sustainability problem …the
current situation is triggered by a lack of willingness to pay (rather than a lack of
ability to pay)…’
Ecuador allegedly performed an aggressively secondary repurchase via
intermediaries when the price for the defaulted 2012 and 2030 bonds hit rock
bottom ((increased trustee responsibility in post-default scenarios + prohibitions
against a borrower repurchasing its defaulted debt).
ANOTHER CASE STUDY (Ecuador Again!)
Most Relevant Findings by the CAIC
SOVEREIGN
DEBT
Comments
on the Findings
RESTRUCTURING
The increase of the interest rates by the US
Federal Reserve in the late 1970s constitutes
an illegal practice
Ecuador does not have the capacity to determine the legality of the monetary policies of
the US Federal Reserve.
The conversion of accrued interests in arrears
in Past Due Interest (PDI) Brady Bonds and
Interest Equalization (IE) Brady Bonds resulted
in anatocism and therefore is illegal
The conversion of accrued interests in arrears into Brady bonds implied a novation of the
original obligation giving rise to a new debt instrument with its own terms and conditions.
The inclusion of an interest rate in bonds in a common and legal practice.
Submission to foreign court jurisdiction is
contrary to Ecuadorian law
Submitting to a foreign court jurisdiction is a common practice in international sovereign
debt transactions. Usually a specific exception is obtained for that purpose. Otherwise,
international lenders will not be willing to lend. This is expressly acknowledged in the
CAIC report (see page 51).
Waiver of sovereign immunity is contrary to
Ecuadorian law
This is a common practice in the international sovereign debt markets. However, in the UK
(SIA §3.1(a)) and the US (FSIA §1605), those activities in which the action is based upon
a commercial activity will be considered as an exception to the general state immunity
from jurisdiction.
To maintain a relationship with multilateral
organizations (e.g. IMF) is contrary to
Ecuadorian law
It seems that what constitutes an illegal practice is to agree in a written contract that
Ecuador will maintain a formal relationship with multilateral organizations, i.e. to continue
being a member of organizations as the IMF, WB, etc..
The lack of registration of certain bonds with
the US Securities and Exchange Commission is
against the law
According to US securities law, bonds can be sold to Qualified Institutional Buyers by
means of a private placement of unregistered securities outside the US (Rule
144A and Regulation S). The advantages are that it requires substantially less
disclosure requirements and it implies fewer costs. After a seasoning period, the securities
can target US private investors.
The choice of foreign governing law is illegal
under Ecuadorian law
The choice of a foreign governing law in international sovereign bond issuances is also a
common practice that is usually resolved by a specific norm authorizing it as an exception
to the general rule. For example, the ‘Ecuador Noteholder Circular dated 20 April 2009 to
submit in a modified Dutch auction to sell Bonds for Cash’ states that the choice of a
foreign law (New York law) in the area of public debt affects national sovereignty (see
page 16 of the Circular). However, the Circular itself is subject to English law which
accounts for a similar situation (see page 13 of the Circular).
Legal force, its
effectiveness
and its binding
nature
Assessing sovereign debt, in general
terms, can refer to different aspects, e.g.
financial, economic, legal, social, etc.
The assessment can be performed before
(ex ante) or after (ex post) a benchmark
moment in time which usually is the
incurrence
of
a
debt
obligation
documented in a legal instrument.
What can be assessed? the validity and
legitimacy of debt.
?
The state or
quality of being
legitimate, i.e.
the rightfulness
of the debt
obligation
LEGITIMACY
EX-ANTE
v.
EX-POST?
VALIDITY
Validity an objective test based on the
governing law of the debt instrument.
Legitimacy a subjective test that is usually
performed under a different political government
than the one who incurred the debt obligation
(same aim but probably a different criteria for
priorities the legitimacy of the debt incurrence
can be questioned (+ difficult shadows of
doubts about the “legitimacy” of governments,
e.g. corruption or despotic practices.
Since the analysis is performed ex-post, it
entails a degree of uncertainty.0
AN UNDESIRED OUTCOME
When Raúl Alfonsín took office as the democratic
elected president of Argentina after the military
regimes (1976-1983), he stated that ONLY those
debts that were legitimate were to be honored.
The Argentine Senate unanimously decided the
creation of a commission to investigate illicit economic
acts performed between 1976 and 1983.
The Argentine Congress passed law 23,062 in May
1984 whereby all acts and norms adopted by the
military regime lacked of legal validity.
This law was complemented by law 23,854, repelling
the all the financial transactions carried out between
1976 and 1983.
Alfonsín, in an interview stated that the debt audit
provided a result different from that expected, ‘…only
in a very small, in fact irrelevant, number of cases
we were able to effectively prove that we were
dealing with [illegitimate] loans…’.
56
CAMEROON:
Grace Church Capital
Based in the Cayman Islands
Still in court, seeking $39.7 million
NICARAGUA:
Greylock Global Opportunity
Based in the British Virgin Islands
Won $50.9 million judgment
DEMOCRATIC REPUBLIC OF
CONGO:
FG Hemisphere
Based in the U.S.
(1) Won $151.9 million judgment
(2) Won $81.7 million judgment
CONGO REPUBLIC:
Kensington International
Based in the Cayman Islands
ZAMBIA:
Donegal International
Based in the British Virgin Islands
Vulture funds purchase defaulted debt to satisfy the seller’s
liquidity requirements.
Take risk in exchange of face value reduction.
Vulture funds provide a floor for the value of the debts of many
poorly graded borrower countries.
Illegal actions should be pursued with all the weight of the law.
57
THE WAY FORWARD
It is important to revert this status quo.
Provide certainty to assess the level of protection of
rights, certainty and predictability of outcomes in
sovereign debt lending and borrowing.
The main objective should be to focus more on the
fostering of the system as a whole by means of
prevention rather than focusing on the ex-post
effects, taking into account not only the large number
of parties involved but also the multi-faceted nature of
the sovereign debt.
Facilitation? lenders and borrowers should refer to
an agreed set of standards to observe during the
negotiation phase a common reference point in the
case of a dispute + enhance responsible practices.
Guidelines of utmost importance: betterment of
the debt markets by means of clear and predictable
scenarios which are beneficial and convenient for the
different parties involved and could even reduce
lending costs.
Any Questions ?
谢谢. Cam rá. Efharisto. Obrigado.
Gracias. Grazie. Thank You.
Merci. Dankeshen. Etc.
[email protected]
59
DEFINITIONS
CACs are clauses whereby, if they are included in the prospectuses of the bonds, the
interaction of the bondholders is required. There are four different types of CACs. These are:
(1) collective representation clauses; (2) majority action clauses; (3) sharing clauses; and (4)
acceleration clauses. Within CACs, majority action clauses are the type of clauses that have
been strongly pursued by the official sector and many academics, and they were effectively
incorporated in bond issuances. Majority action clauses enable the amendment of any of the
terms and conditions of the bonds, including the payment terms, if the required majority
therein established is obtained. So far, the required threshold to amend the terms of the
bonds containing majority action clauses has been 75% in aggregate principal amount of the
outstanding bonds (e.g. Egypt, Lebanon, Mexico, Qatar, Uruguay, etc). Brazil and Belize have
been the only cases where 85% has been required.
Exit consent is the technique, by which holders of bonds in default, who decide to accept an
exchange offer, at the moment of accepting the said offer, grant their consent to amend
certain terms of the bonds that are being exchanged. By using the exit consent technique, the
exchange offer is conditioned to a minimum threshold of creditors’ acceptance and the
amendments to the terms are performed once the required majority has been obtained. By
means of these amendments, the defaulted bonds subject to the exchange offer become less
attractive (in legal and financial terms), forcing a greater number of bondholders to accept the
exchange offer. Otherwise, if holdout bondholders do not accept the exchange offer, they will
be holding an impaired bond not featuring some of the original contractual enhancements.60

Rethinkng Sovereign Debt Restructuring

Transcription

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